Hedge Fund Franchises

William Fung (), David Hsieh (), Narayan Naik () and Melvyn Teo ()
Additional contact information
William Fung: Board of Trustees, CFA Institute Research Foundation, Charlottesville, Virginia 22902
David Hsieh: Fuqua Business School, Duke University, Durham, North Carolina 27708
Narayan Naik: London Business School, London NW1 4SA, United Kingdom
Melvyn Teo: Lee Kong Chian School of Business, Singapore Management University, Singapore 178899

Management Science, 2021, vol. 67, issue 2, 1199-1226

Abstract: We investigate the growth strategies of hedge fund firms. We find that firms with successful first funds are able to launch follow-on funds that charge higher performance fees, set more onerous redemption terms, and attract greater inflows. Motivated by the aforementioned spillover effects, first funds outperform follow-on funds, after adjusting for risk. Consistent with the agency view, greater incentive alignment moderates the performance differential between first and follow-on funds. Moreover, multiple-product firms underperform single-product firms but harvest greater fee revenues, thereby hurting investors while benefitting firm partners. Investors respond to this growth strategy by redeeming from first funds of firms with follow-on funds that do poorly. Empirically, the multiple-product firm has become the dominant business model for the hedge fund industry. This paper was accepted by Tyler Shumway, finance.

Keywords: hedge funds; spillover; agency problems; first funds; follow-on funds (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:67:y:2021:i:2:p:1199-1226

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